Part III: THE NEW ERA OF FCPA ENFORCEMENT: INCREASING SUMS PAID TO SETTLE
This is the third in a series of five articles that will be posted this week examining current trends in FCPA and anti-corruption enforcement. The posts are excerpts from a forthcoming article by Thomas Gorman and William McGrath.
FCPA liability can be mitigated through self-reporting and cooperation according to the DOJ and the SEC. Each has published standards discussing cooperation. While there is no doubt that self-reporting and cooperation can mitigate liability and reduce the cost of sanctions, it is also clear that the cost of settlement is spiraling upwards. Indeed, the hallmark of recent corporate FCPA settlements is the increasingly large sums paid as part of the resolution of the inquiries. In 2007, for example, Chevron, discussed earlier in this series, paid $30 million to resolve FCPA investigations with several agencies, setting a new record in the process. Four years later, not only has the Chevron record been surpassed, the amount paid by the oil company is not even large enough to rank in the top ten.
Presently, the ten largest amounts paid to resolve FCPA charges are: 1) Siemens: $800 million in the U.S. and $1.6 billion overall in 2008; 2) KBR/Halliburton: $579 million in 2009; 3) BAE: $400 million in 2010; 4) Snamprogetti Netherlands B.V.: $365 million in 2010; 5) Technip SA: $338 million in 2010; 6) JGC Corporation: $218 million in 2011; 7) Daimler AG: $185 million in 2010; 8) Alcatel-Lucent France SA: $137 million in 2010; 9) Panalpina: $81.8 million in 2010; and 10) Johnson & Johnson, Inc: $70 million in 2011; according to the FCPA blog.
While the charges brought by the DOJ in these cases tend to reflect the underlying conduct, liability is typically mitigated through cooperation credit which can result in a settlement involving a non-prosecution agreement with a reduced criminal fine. At the same time that credit appears to have little impact on the resolution of the SEC charges.
What is often overlooked is the cost of earning cooperation credit. That credit is a function of self-reporting, furnishing the DOJ and the SEC all the facts as gathered in a comprehensive internal investigation and full remediation. To earn credit under this formula, Siemens, discussed below, paid for 1.5 million billable hours of professional time. More costs are expended in the remediation and monitoring process. Overall the price of cooperation may exceed the amount of the credit earned and the reduction in the fine, acting as a kind of concealed penalty or fine.
The cases in the top ten involve conduct which ranges from using bribery as a standard business tool to a year’s long conspiracy to more limited wrongful actions. To analyze the settlement patterns in these actions they will be classified into three groups: (1) pervasive patterns of violations; (2) a year’s long conspiracy; and (3) more limited wrongful conduct.
The cases against Siemens, Daimler, Alcatel-Lucent, Panalpina (discussed earlier) and BAE are all based on patterns of conduct which enforcement officials described as pervasive, using bribery as a way of conducting business or in similar terms. In each instance the resolution with DOJ was significantly impacted by what was acknowledged to be extensive cooperation. The cooperation credit typically was evidenced by a significant reduction in the criminal fine and in some cases a settlement involving a deferred prosecution agreement. The charges tended to reflect the underlying conduct. The sole exception is the action involving BAE where the company chose not to cooperate.
Siemens resolved possible criminal charges with the company pleading guilty to one count of failing to maintain internal controls and one count of books and records violations. U.S. v. Siemens Aktiengesellschaft, Case No. 08-367 (D.D.C. Filed Dec. 15, 2008). The company also agreed to pay a record criminal fine of $445 million and to retain an independent monitor for four years. Three of its subsidiaries plead guilty to conspiracy charges. U.S. v. Siemens S.A. (Argentina), Cr. No. 08-368 (D.D.C. Filed. Dec. 15, 2008); U.S. v. Siemens Bangladesh Ltd., Cr. No.08-369 (D.D.C. Filed. Dec. 12, 2008); U.S. v. Siemens S.A. (Venezuela), Cr. No.08-370 (D.D.C. Filed. Dec. 15, 2008). While the fine is significant, it represents about half of the lower end of the sentencing guideline calculation.
To settle with the SEC the company consented to entry of a permanent injunction prohibiting future violations of the bribery and books and records provisions. The company also agreed to pay about $350 million in disgorgement along with prejudgment interest. SEC v. Siemens Aktiengesellschaft, Case No. 1:08-cv-02167 (D.D.C. Filed Dec. 15, 2008). The SEC complaint alleges that bribes were paid using U.S. jurisdictional means including subsidiaries, the banking system and loans from the World Bank and the U.S. Export Import Bank.
The underlying conduct reflected in the charges traces to at least the mid-1990s and continued through 2007. The conduct was facilitated by a decentralized structure and fostered by significant pressure from the parent company to meet sales quotas and a failure to clearly state that the company would rather lose business than pay bribes, according to the court papers. Compliance programs were limited and ineffective while warnings over the years of improper conduct were ignored.
From the time Siemens AG was listed on the New York Stock Exchange through 2007, about $1.36 billion in payments were made through various mechanisms. Of that amount, about $805.5 million were corrupt payments to foreign officials. Another $554.5 million was paid for unknown purposes, including $341 million that went directly to business consultants. The bribes were paid by subsidiaries in the Middle East, Latin America and Bangladesh.
The DOJ termed the cooperation of Siemens “extraordinary,” although the company did not self-report. The settlement papers have a more extensive discussion of that cooperation than in any of the other top ten cases. According to the DOJ, investigative counsel conducted an extensive and completely independent inquiry without any limitation. The investigative work took place in 34 countries, involved over 1,750 interviews, 800 informational meetings and the collection of over 100 million documents. Approximately 24,000 documents totaling over 100,000 pages were produced to the DOJ.
Siemens established a Project Office at its headquarters staffed by 16 full time employees. The company also established, in consultation with DOJ, amnesty and leniency programs to ensure the cooperation of employees. As part of the process Siemens took extensive steps to preserve and collect data worldwide despite the difficulty of this task, and developed information on others. The company also undertook extensive remediation efforts which were a critical part of the overall effort, revamping its entire top leadership and reorganizing its operations while greatly expanding its compliance organization. Overall, the company spent about $150 million on its remediation efforts.
Enforcement officials claimed that Daimler had a culture similar to that of Siemens, which facilitated the wrongful conduct. It was also aided by the deficient anti-bribery procedures of the company. In contrast to Siemens however, Daimler, whose shares were traded in New York, resolved the criminal inquiry by entering into a deferred prosecution agreement at the parent level with a term of three years. The criminal information charged the company with one count of conspiracy to violate the books and records provisions of the FCPA and a second which alleged violations of those provisions since U.S. based subsidiaries were used. Under the agreement, Daimler paid a criminal fine of $93.6 million and had a monitor installed for a period of three years. U.S. v. Daimler AG, No. 10-063 (D.D.C. Filed March 22, 2010). As part of the overall resolution of the case two Daimler subsidiaries pleaded guilty while a third entered into a deferred prosecution agreement.
The company settled with the SEC on the same terms as Siemens. It consented to the entry of a permanent injunction prohibiting future violations of the bribery and books and records provisions and agreeing to pay disgorgement of $91.4 million along with prejudgment interest. SEC v. Daimler, AG, Case No. 1:10-cv-00473 (D.D.C. Filed Apr. 1, 2010)
The settlements were based on a decade long scheme alleged to have involved millions of dollars and which yielded about $50 million in profits from transactions with a U.S. nexus. Three subsidiaries charged by the DOJ were at the center of the bribery charges. Frequently employees from the corporate parent facilitated the conduct of the subsidiaries. Millions of dollars in bribes were paid in 22 countries, according to the charging papers, including China, Croatia, Egypt, Greece, Hungary, Indonesia, Iraq, Ivory Coast, Latvia, Nigeria, Russia, Serbia and Montenegro by Daimler and its German and Russian subsidiaries. A variety of mechanisms were used to make the payments, including corporate ledger accounts known internally as “third-party accounts,” “cash desks,” offshore bank accounts, deceptive pricing arrangements and third party intermediaries. To conceal these transactions the books and records were repeatedly falsified. Indeed, the SEC counted 151 separate violations of the books and records provisions.
Like Siemens, Daimleralso made extensive efforts to cooperate which the DOJ described as “excellent. ” Like Siemens, Daimler did not self-report. Cooperation followed an accusation of corruption by an employee. Throughout its internal investigation into the matter, the company kept authorities apprised of its progress, took appropriate disciplinary actions terminating 45 employees, imposed sanctions on 60 others and made “certain witnesses” available on request. Daimler also undertook a series of remedial actions, including centralizing its compliance operations and corporate audit functions, adding a compliance component at the board level, setting up a whistleblower hotline and adding anti-bribery terms to its contracts. Unlike Siemens, the company did not develop information about other companies for the government. The impact of this cooperation is perhaps best seen in the criminal fine which is about 20% below the bottom of the sentencing guideline range.
Alcatel-Lucent also settled with the DOJ by entering into a deferred prosecution agreement at the parent level. Like Siemens, the company was charged in an information with one count of violating the FCPA internal controls provisions and one count of violating the books and records provisions. Three subsidiaries were also charged and pleaded guilty to a conspiracy charge. U.S. v. Alcatel-Lucent France, S.A., Case No. 10-20906 (S.D. Fla. Filed Dec. 27, 2010).
Like the other companies in this group, the wrongful conduct by Alcatel-Lucent involved a year’s long scheme of repeated violations. It was facilitated by the business model and a lack of anti-corruption procedures. The company is the product of a 2006 merger between French telecommunications equipment and services company Alcatel, S.A. and U.S. based Lucent Technologies. Its shares were traded in New York. The French company had a decentralized structure and conducted business through third party agents and consultants retained by subsidiary Alcatel Standard A.G. Before 2006 virtually no due diligence was conducted before an agent or consultant was retained, a practice DOJ later characterized “prone to corruption.” While the company had anti-corruption procedures, they were largely ignored according to the settlement papers.
From the late 1990s through the time of the merger Alcatel, through various subsidiaries, engaged multiple violations of the FCPA, according to the court papers. The claimed wrongful conduct in Costa Rica yielded more than $300 million in business and over $23 million in profits. In Honduras there were about $47 million in contracts with about $870 million in profits while in Malaysia and Taiwan there were over $100 million worth of contracts. The company also admitted to FCPA violations relating to its internal controls and books and records violations “related to the hiring of third-party agents in Kenya, Nigeria, Bangladesh, Ecuador, Nicaragua, Angola, Ivory Coast, Uganda and Mali.” Alcatel-Lucent earned approximately $48.1 million in profits as a result of these improper payments. All of the illegal payments were improperly recorded in the books and records of the company which had inadequate internal controls. At first the company gave “limited and inadequate cooperation” which later “substantially improved,” according to the government. The court papers in the criminal cases make little mention of the cooperation in sharp contrast to those in Siemens and Daimler. Alcatel-Lucent did, however, voluntarily reform its basic business model, a step DOJ termed “unprecedented.” The impact of that cooperation is perhaps reflected by the fact that the parent company entered into a deferred prosecution agreement and did not plead guilty like Siemens. The criminal fine was set at the low end of the guideline range however, in contract to those paid by Siemens and Daimler.
Finally, BAE pleaded guilty to conspiring to defraud the government, to making false statements about its FCPA compliance program and to violating the Arms Export Control Act and International Traffic in Arms Regulations. The company also agreed to pay a criminal fine of $400 million, which was the maximum fine permitted for the charges. A corporate monitor was installed for three years to supervise the company’s compliance obligations. U.S. v. BAE Systems plc, 1:10-cr-035 (D.D.C. Filed Mar. 1, 2010).
BAE, like Siemens, Daimler and Alcatel-Lucent, reflects years of violations. At the same time the action differs substantially from the other cases in this group. The FCPA allegations stem from its undertakings to the U.S. government to implement FCPA compliance procedures in view of its role as the world’s second largest defense contractor and fifth largest provider of defense materials to the U.S. government. In November 2000 as the company expanded its role as a U.S. defense contractor, BAE represented to the U.S. government that it would comply with the FCPA as if it were subject to the Act. The company told government officials that appropriate compliance mechanisms would be put in place within twelve months. Two years later, in the face of rumors that it had obtained several contracts in Eastern Europe by paying bribes, BAE reassured the Department of Defense in writing and presentations that all of its business had been obtained in compliance with the FCPA.
The representations were false. The company made payments that were not subject to the level of scrutiny which BAE assured the government it had used. Rather, using elaborate systems constructed to secrete its activities, BAE repeatedly made payments when it was aware that there was a high degree of probability they would be used to influence government decision makers in the purchase of defense materials. Overall, BAE intentionally failed to create mechanisms to ensure compliance with the FCPA. The company also failed to identify commission payments as required in connection with the sale and exports of defense articles and services. According to an agreed statement of facts, BAE’s violations resulted in a gain of $200 million.
Year’s long conspiracy
Four cases in the current top ten involve participants in the same conspiracy and joint venture: Kellogg Brown & Root, Snamprogetti Netherlands B.V., Technip S.A. and JGC which was analyzed in an earlier part of this series. While the violations here focus on a year’s long pattern as in Siemens and Daimler and the other cases in the first group, the wrongful conduct is limited to a single on-going project rather than a pattern of acts involving multiple projects and jurisdictions. Each company cooperated once the conduct was discovered. Those efforts had a varying impact on the charging decision.
The underlying conduct traces to 1990. The four companies formed the TSKJ joint venture to secure contracts from Nigeria LNG, Ltd., a company created by the Nigerian government to capture and sell natural gas associated with oil production in that country. The government retained a 49% interest in Nigeria LNG.
The joint venture determined that bribes had to be paid to secure business. Former KBR CEO Albert Stanley and others met at crucial times with three successive former holders of a top-level office in the Nigerian government to ask for the designation of a representative with whom the joint venture could discuss bribes for government officials. Mr. Stanley and others negotiated the amount of the bribes with a representative of the office holder and agreed to hire two agents to pay the bribes. The joint venture then paid about $132 million to one agent and $50 million to another. The payments were funneled through sham contracts with shell companies. They yielded contracts worth more than $6 billion. The corrupt payments were not properly recorded in the books and records of any of the companies.
The charges are a function of the underlying conduct, the jurisdictional reach of the statute and the cooperation credit. KBR and Technip were the two joint venture partners with the most significant U.S. contacts. KBR, was a domestic concern. Its chairman, a U.S. citizen residing in Houston, Texas and also a domestic concern, took a prominent role in the operations of the conspiracy and eventually pleaded guilty to FCPA charges.
KBR resolved the DOJ investigation by pleading guilty to a five-count information charging conspiracy and four counts of bribery – a harsher result than any of the companies in the first group. As part of the plea agreement, the company agreed to retain a monitor for three years and agreed to pay a $402 million criminal fine which is only marginally below the mid-point of the sentencing guideline range. In the papers the DOJ acknowledge the cooperation of the company without further comment, a sharp contrast to those in Siemens and Daimler. U.S. v. Kellogg Brown & Root LLC, Case No. H-09-071 (S.D. Tex. Filed Feb. 11, 2009).
Technip is a French issuer with a class of securities registered for trading with the SEC. Accordingly, it is subject to the non U.S. issuer jurisdictional provisions. The information claimed in part that the company caused its agent to wire money from one foreign bank to another through New York to another foreign bank for the TSKJ consortium in addition to other U.S. contacts by agents of the conspiracy. Technip resolved the charges by entering into a deferred prosecution agreement and agreeing to pay a criminal fine of $240 million, a 25% reduction from the bottom of the guideline range which reflected the full cooperation of the company. The underlying information charged one count of conspiracy and one count of violating the FCPA. U.S. v. Technip S.A., Case No. H-10-349 (S.D. Tex. Filed June 28, 2010).
In contrast, neither Snamprogetti nor JGC are issuers or domestic concerns. Both were charged in two count indictments alleging conspiracy to violate the FCPA and aiding and abetting KBR’s violations of the anti-bribery provisions based on U.S. contacts by agents through the banking system. Both companies resolved the criminal inquiries by entering into deferred prosecution agreements. In addition, Snamprogetti agreed to pay a criminal fine of $218.8 million which is a 20% discount from the lower end of the guideline range while JGC paid $218.8 million which represents a 30% discount from the bottom of the range. The DOJ acknowledged the cooperation of each company although JGC initially declined to cooperate while raising jurisdictional questions. U.S. v. Snamprogetti Netherlands B. V., Case No. H-10-460 (S.D. Tex. Filed July 7, 2010).
Finally, the four companies settled on essentially the same terms with the SEC, tailored to the specific facts. KBR consented to the entry of a permanent injunction prohibiting future violations of the anti-bribery and record falsification provisions and from aiding and abetting violations of the record keeping and internal control provisions of the FCPA while its parent Halliburton agreed to the entry of an injunction prohibiting future violations of the record keeping and internal control provisions. The companies also agreed to pay disgorgement of $177 million. SEC v. Halliburton Company, Case No. 4:09-CV-399 (S.D. Tex. Filed Feb. 11, 2009). Technip consented to the entry of a permanent injunction prohibiting future violations of the bribery and books and records provisions and agreed to pay $98 million in disgorgement. SEC v. Technip, Case No. 4:10-cv-02289 (S.D. Tex. Filed Jun. 28, 2010). Snamprogetti consented to the entry of a permanent injunction prohibiting future violations of the bribery and record keeping and internal controls provisions while its former parent, ENI, S.p.A., agreed to be enjoined from future violations of the recordkeeping and internal control provisions based on allegations that it failed to ensure that its former subsidiary complied with its internal controls concerning the use of agents. The two companies are jointly liable for the payment of $125 million in disgorgement. EC v. ENI, S.p.A., Case No. 4:10-cv-0214 (S.D. Tex. Filed July 7, 2010).
The underlying conduct in the actions involving Johnson & Johnson Inc., a U.S. based issuer, differs significantly from that of the others in the top ten. Here there are no allegations that bribery was a way of doing business or that there was a year’s long conspiracy. Although the case is based on multiple violations in four countries and there are allegations of involvement by parent company employees similar to those in Daimler, the alleged wrongful conduct is largely confined to the subsidiary level.
The cases are based on payments by J&J subsidiaries to publicly-employed health care providers in Greece, Poland and Romania. Kickbacks were also paid on behalf of company subsidiaries to the former government of Iraq under the U.N. Oil for Food Program. In Greece payments were made by subsidiary DePuy Inc, through local agents to facilitate the sale of product beginning prior to, and continuing after, the acquisition of the company by J&J in 1998. Over $24 million in profits resulted. In Poland J&J subsidiary MD&D Poland used sham contracts and travel documents to create a slush fund to channel bribes to doctors yielding about $4.3 million in profits over a seven year period. In Romania subsidiary J&Jd.o.o. made cash payments to doctors and pharmacies in connection with the sale of drugs, yielding about $3.5 million in profits over seven years. Finally, Cilag AG International and Janssen Pharmaceutica N.V. sold pharmaceuticals as part of the U.N. program through an agent. About $850,000 in bribes were paid to facilitate sales.
To resolve the inquiries J&J self-reported, fully cooperated and, aided the investigative efforts of enforcement authorities in developing evidence as to others, furnishing what the DOJ called “extraordinary cooperation.” Those efforts were aided by the FCPA compliance procedures of the company. J&J is thus the only company in the top ten to self-report, offer this level of cooperation and have significant FCPA compliance procedures.
The DOJ did not bring any charges against J&J. The company did, however, enter into a deferred prosecution agreement with respect to its subsidiary Depuy Inc. which was charged in a two-count information alleging conspiracy and violations of the FCPA. J & J also agreed to pay a criminal fine of $21.4 million which is below the bottom of the guideline range. The DOJ also considered fact that the company and Depuy under a civil forfeiture order paid ?4.829 million to U.K. regulators. U.S. v. Depuy, Inc., (D.D.C. Filed April 8, 2011).
In contrast, the settlement terms with the SEC are consistent with those of others in the top ten. The company consented to the entry of a permanent injunction prohibiting future violations of the anti-bribery and book and records and internal control provisions of the FCPA. J&J also agreed to pay $38,227,826 in disgorgement and $10,438,490 in prejudgment interest. Indeed, but for the disgorgement and interest payments in the SEC settlement, J&J would not have been in the top ten. SEC v. Johnson & Johnson, Civil Action No. 1:11-cv-00686 (D.D.C. Filed April 8, 2011).
Next: Focus on individuals and calls for reform